Between 1984 and 2001, the share of non-elderly adults receiving cash benefits under the Social Security Disability Insurance program (DI) in the US rose by 60 percent to 5.3 million beneficiaries. As a result, total outlays under DI exceeded $65 billion in 2002, comprising almost 3.4% of the U.S. federal budget. This research empirically investigates the extent to which social interactions affect participation in disability programs such as DI using a unique Norwegian data set. Social interaction effects could help explain the wide variation in DI participation across regions and over time. The magnitude of such effects is critically important for predicting the impact of DI policy and economic shocks on DI participation rates.
Social interaction effects refer to the impact that the behavior of one individual has on the behavior of another. In the context of DI, this interdependence could, for example, arise because of social norms. Social norms against DI utilization can reduce participation rates by imposing a utility cost or stigma on recipients. As DI use increases among one's peers, this stigma is expected to decline, thereby increasing the propensity to apply for DI benefits for members of high-utilization peer groups.
Identifying social interaction effects in observational data is notoriously difficult due to suspicions of omitted variable bias. This problem will be addressed using a rich 11-year panel dataset containing disability participation records for every person in Norway. A novel instrumental variable (IV) strategy will be employed, using previous years peer groups layoffs as an instrument for changes in-group participation rates. The intuition behind this approach is that f social interaction effects exist, peer groups disproportionately hit by layoffs should exhibit a relative increase in disability applications even among members who were not themselves laid off. The results of this research could provide important insights into the formulation of social safety net programs in the US.
